India’s manufacturing sector picking up the pieces after GST kicks in

Also, as order inflow improved, manufacturers opted for hiring more manpower in September. Graphic: Subrata Jana/Mint

Business conditions among manufacturers saw a modest improvement in September, supported by better output and new orders.

The Nikkei Purchasing Managers’ Index (PMI), a monthly survey, showed that manufacturing PMI remained unchanged at 51.2 in September. With that, PMI breached the 50-mark for two successive months. A reading above 50 indicates economic expansion, while one below 50 points to contraction.

Consequently, business confidence among manufacturers, which was dented by concerns relating to the goods and services tax (GST), also witnessed some improvement. As the accompanying chart shows, the Future Output Index that touched a three-month low of 59 in June has recovered. The index had hit a low as producers anticipated disruption due to GST. In September, the index moved up to 61.7 and is now back at the level seen in May.

Also, as order inflow improved, manufacturers opted for hiring more manpower in September. According to the survey, the rate of employment growth quickened to the fastest since October 2012. However, the rate of employment itself was modest.

Aashna Dodhia, an economist at IHS Markit and author of the report, said, “September data painted an encouraging picture as the sector continued to recover from the disruptions caused by the introduction of the GST in July. This sustained amelioration reflected expansions in new work and output, supported by stronger domestic demand conditions. Subsequently, business confidence strengthened among manufacturers as they reportedly anticipate long-term benefits from recent government policies. This was confirmed as the sector experienced meaningful gains in employment. That said, output and new business growth remained weak in the context of historical survey data.”

GST has now been in place for three months but ambiguity on refunds and technical glitches relating to filing of GST returns persist. However, the PMI data suggests that the formal sector may be gradually getting accustomed to the new system, which is why their future outlook is showing an improvement.

Given the large share of the informal economy, comprising small and medium-sized units, whether the same is true for them cannot be concluded, since the PMI survey sample usually comprises larger companies.

While the survey offers a glimmer of hope for a recovery in the manufacturing sector, IHS Markit also downgraded its real gross domestic product growth forecast from 7.1% to 6.8% for fiscal year 2018.